On a chart, overlay 2 lines, one line charting the 10 year bond rate, the other charting a shorter dated bond, say the two year, or what is more commonly used for comparison, the 90 day bill. The 90 day bill moves as a direct result of how the Reserve Bank sets its interest rate policy. The long bond (10 year) however, is much more influenced by the opinions of buyers and sellers of these bonds on how the future course of the economy will be, especially taking into account inflationary tendencies. The long bond is not influenced by Reserve bank action.

You might have noticed therefor, some interesting comparisons could be made;
When the short term interest rate is below the long term rate, the yield curve is said to be positive. A positive yield curve is indicating an economy that will grow (or continue growing) in the near future. (Most often the case).

When short term interest rates are higher than long term rates the yield curve is said to be negative. A negative yield curve is indicative that the economy has been growing strongly in the past.

These days, and certainly since the second world war, Reserve Banks have been active with monetary policy in setting the level of interest rates in accordance with their set policy objectives. It probably goes without saying that when the economy is booming, interest rates generally are increased, to slow inflation and / or reign in business activity. The yield curve goes negative. The opposite condition arises where the economy has been in recession, coming out of recession, or in the middle of the decade cycle, short term interest rates have been lowered, as a policy objective to increase business activity.

Hence this can give us a barometer of economic conditions. Beginning in 1999, the US Federal Reserve began lifting interest rates. This affected all shorter dated yield bearing securities. At around the same time, long bonds were dropping as the US Treasury had the chance (does not happen often in this instance) of buying back some of its debt. Short interest rate yields went above long dated bond yields, ie an inversion, or negative yield curve. When this happens, it is often a sign that the economy has been growing in the past, Reserve banks are trying to slow it down (by lifting rates) and we hear talk of "engineering a soft landing".

A recession is usually the result. Study the above in the context of all the cycles material up on the site, and in particular refer to the EIS economic barometer section. We drew your attention to the above conditions at the time, in 1999, clear forewarning of a downturn to come. Learn this to be better prepared next time, which is how I learnt back in ' 74, believe it or not.